Finance Minister Arun Jaitley on Thursday proposed a 10% Dividend Distribution tax (DDT) on dividend options of equity funds to bring them on par with the growth schemes.

"I also propose to introduce a tax on distributed income by equity oriented mutual fund at the rate of 10%. This will provide level playing field across 30 growth oriented funds and dividend distributing funds, FM Jaitley said in his Budget speech.

The move is likely to hit investor sentiment as domestic mutual funds had pumped in a staggering over Rs 1 lakh crore in the stock market last year, much higher than over Rs 48,000 crore infused in 2016 and more than Rs 70,000 crore in during 2015. In fact, the investment by mutual funds in equities has outshone those by foreign portfolio investors (FPIs) in past few years.

"Sentiments may get impacted as mutual funds have been gaining traction among investors as route to invest in stock markets," HDFC AMC Chairman Deepak Parkeh said.

The 10 percent tax on mutual fund dividends is in addition to the Securities Transaction Tax (STT) on transaction in shares, bonds, debentures, derivatives units, interest in securities and equity mutual funds. For delivery-based equity transactions, STT for purchase and sale is 0.1% of turnover. For intra-day transactions, STT for purchase is nil and sale is 0.025% of the turnover.

Kaustubh Belapurkar, Director - Manager Research, Morningstar Investment Adviser India said, "Introduction of a 10% Dividend Distribution tax (DDT) on dividend options of equity funds to bring them on par with the growth schemes. This move may impact flows into funds where investors were primarily entering with the expectation of regular dividends. In, fact dividend schemes are now slightly disadvantaged as opposed to growth schemes as LTCG below 1 lakh is exempt from tax."